S&P 500 - January Effect Back On Track

by: Dean Popplewell

by Mingze Wu

So much for the doom and gloom on Monday, where a sudden sell-off in U.S. equities was seen. At that point in time, there was genuine concern that the market has started the long awaited bearish correction in share prices as Price/Earning ratios were actually considered rather inflated compared to historical average. Nonetheless, all these concerns proved to be unwarranted as Stock prices ultimately climbed back higher once more, with the S&P 500 hitting a new record high once again.

Perhaps we should have seen this coming, with Futures prices actually pushing higher when the Monday U.S. session closed. This, together with Tuesday's rally, should have told us that the decline on Monday may not have strong bearish follow-through, and has a high likelihood of irrationality involved given that there wasn't any economic data that could have been the catalyst for the sell-off. The only reason for the sell-off therefore would be due to large sell orders which could have been initiated either by a few large organizations, or a large proportion of the market. Tuesday's rally which pushed prices back above 1,830 support turned resistance should have been the red flag that warned us that Monday's sell-off is not an indication of broad market sentiment, even though volume traded did increase.

Hourly Chart

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With S&P 500 now trading above the pre NFP release levels, it is clear that the market remains bullish. This coupled with the previously established observation that traders are no longer concerned with QE taper, implies that we could see stronger bullish response from better than expected economic news, while bearish economic numbers may still result in short-term declines which may provide bargain prices for bullish traders to buy into.

From a technical perspective, price is currently being supported by the ascending Channel Top, with potential for further bearish acceleration higher if 1,850 is broken. Stochastic indicator is technically bearish as Stoch curve is currently below the 80.0 level after spending a considerable time within the Overbought region. However, it's possible that Stoch curve can reverse not far from here with 60.0 - 75.0 a "support band" keeping Stoch curve afloat. This is in line with a bullish rebound from Channel Top, or suggests that 1,845 will be able to hold even if prices break within the rising channel.

Daily Chart

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The Daily Chart favors the possibility of a bullish breakout. Stochastic readings appear to have bottom out above the 50.0 level, suggesting that a bullish cycle will be in play soon should Stoch curve push above 65.0 which will most likely be in conjunction with price breaking 1,850 resistance level.

All this bullishness means that the long awaited bearish pullback will require yet more patience. Considering that January is statistically a bullish month (dubbed January Effect), traders may need to wait until early February before current bullishness abates.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.